A cash advance is a short-term loan that is designed to cover important needs and then be repaid via upcoming income. If that makes you think, "Wait, this sounds just like a payday loan," then you are partially right: The two loans are similar and the names are often used interchangeably. However, a cash advance does have some small but important differences.
While a payday loan typically depends on one thing – your next paycheck – a cash advance loan tends to be more flexible. It is also often based on credit cards or existing lines of credit, and frequently offered credit card companies that you may already use. This makes the process very easy: Essentially, you are using your current credit card to buy cash instead of products. That means, among other things, that your repayment terms will probably be quite similar to the terms you already have on your credit card.
A payday loan is useful for those who may have bad credit but have a very stable income that lenders can count on. A cash advance through a credit card or line of credit is useful for those who may not have such stable income, but have a very good credit payment history and represent relatively low risk for credit companies. Both, however, often work as a short-term solution to a sudden cash deficit where you need money now to cover necessary expenses.
Advantages & Disadvantages
- Quick and simple. Like payday loans, cash advances tend to be very easy to apply for and receive within only a day or two. This makes them a potential fix for emergency cash shortages, unexpected plans, and short periods of little-to-no income. You also don't have to spend too much time with paperwork – or waiting for underwriting – as you might with a more traditional bank loan.
- Credit card rules. Because cash advances are often made via credit cards, they are typically subject to extra requirements by credit card companies. That may include stipulations that you must pay off the rest of the debt on that card before starting to pay off the advance. It may also mean that your advance is charged at a higher interest rate than your credit card balance.
-Late payment risks. Cash advances allow interest to build easily if you aren't paying attention. It's not advisable to treat this like any other credit card debt: You may end up paying far more than the loan is worth.